Remarks by Angel Gurría
China Development Forum, Session V: Opening up in the ‘New Normal’
Beijing, 22 March 2015
(As prepared for delivery)
Distinguished Guests, Ladies and Gentlemen,
This year marks the 20th anniversary of China-OECD co-operation. Our collaboration has continued to blossom, bearing more fruit with each passing year! In that spirit, I would like to thank Lu Mai and the China Development Research Foundation for the invitation to the Forum.
China is a shining example of how economic lift-off and social progress can be achieved through concerted and comprehensive reforms. The rapid expansion of its economy, which has sustained double-digit growth rates for more than three decades, has fuelled strong improvements in the lives of its citizens.
China is on the right track towards becoming -- to quote Premier Li Keqiang -- a “moderately prosperous society” and achieving its goal of doubling GDP per capita between 2010 and 2020.
Yet, China’s expansion is slowing down. Our projection indicates that GDP growth will moderate to 6.9% by 2016. Structural changes – ranging from a shrinking working-age population to diminishing scope for catch-up – are shifting China onto a slower, but likely more sustainable, growth path. The “New Normal”.
The transition is taking place in a rapidly changing global environment. Shifting patterns of global production, finance, investment, trade, innovation and energy, have all given rise to opportunities as well as challenges for China’s continued development.
Our last edition of Perspectives on Global Development 2014 indicates that average incomes in China will converge on the OECD’s by 2050. But to make this happen, and avoid the “middle income trap”, China must sustain its growth performance and seek to address its domestic challenges, while responding to emerging global trends.
Reaching the ‘New Normal’ will call for China to make “moving up the value chain” a top priority. To date, the country has been successful in integrating into the regional and global value chains (GVCs), but now faces growing competition from low cost producers.
Continued efforts to remove growth-hampering restrictions on trade and investment are needed – particularly in services, which account for an increasing proportion of trade. In value added terms, only 30% of China’s exports reflect services, which is relatively low compared to the OECD average (48%). Our Services Trade Restrictiveness Index (STRI) shows that China fares worse than average in terms of the barriers placed on major service industries. More should be done to address barriers to foreign entry, insufficient transparency of domestic regulations and administrative burdens.
China must also expand its innovation capabilities and invest more in cutting-edge innovation. R&D expenditure is currently at more than 2% of GDP, which is above the EU average, but still behind the United States (at 2.8%), Japan (at almost 3.4%), and Korea (at 4.15%).
Effective policies to accompany the opening-up of trade and investment are essential too, including continued investment in education and healthcare as well as broadening access to the social protection system. In particular, further efforts to align vocational education curricula with the demands of the labour market will also pay dividends over the long-term.
Moreover, China could benefit from strengthening its competition policy framework and reducing regulatory fragmentation. To support pro-competition reforms, the state will also need to establish and enforce health and safety standards and environmental protection legislation.
Developing a strong and well-functioning market-based economy
In order to support China’s move up the value chain, this transition to the ‘New Normal’ needs to go hand-in-hand with a growing role of the market in the economy. The discipline of market competition can bring about a more efficient allocation of resources and allow the growth of innovative, high-growth firms. A number of concrete reforms will be required.
The playing field between state-owned enterprises (SOEs) and private sector firms will need to be levelled further. SOEs still have a large presence in a number of commercially-oriented industries. In the construction sector, they command over one-third of revenues, creating barriers to the expansion of private firms. Moving forwards, implicit guarantees for SOEs should be phased-out as one way to address the issue.
In addition, it would be absolutely essential to give the market a greater role in determining prices, including interest and exchange rates. Our Economic Survey of China, launched two days ago, suggests that the liberalisation of deposit interest rates will be essential to this transition, serving to drive up rates and improve bank efficiency.
Finally, the State would need to adapt its institutions and functions to the ‘New Normal’, with a modernised public administration. This is key. So is the creation of a single, unified code of conduct for civil servants, to regulate against conflicts of interest.
Ladies and Gentlemen, China’s once highly successful model of development can no longer be relied upon to drive future gains. The path to the ‘New Normal’ will not be without bumps in the road, but it is a route that will help China to sustain stronger, fairer, greener and more balanced growth. Count on the OECD to help along the way.